What is an obligatory advance?

Definition of Obligatory Advance

When it comes to real estate, an obligatory advance is an amount of money that was contractually agreed upon between a lender and a borrower. This type of contracted loan advance is in mortgage loans that are dependent on completion of work, such as construction or remodelling mortgages.

Why is this term important?

Borrowers may need an obligatory advance to achieve something that requires more money than what they currently have on hand. For example, an obligatory advance can be given to a borrower who is currently doing construction on a new build or property. That borrower required a loan to complete the project, and now the funds are being given in small payments throughout the term of the project. Aside from construction loans, obligatory advances can also include revolving lines of credit and home equity lines of credit.

Both forms (real estate and construction) of obligatory advances have conditions that must be met based on the legal documents signed to officially accept the loan. In the scenario that includes a construction project, the head of the site would have to follow a certain set of standards to receive their disbursements. To receive an obligatory advance in the case of a real estate scenario like a home equity line of credit, the borrower must keep in good financial standing to receive their disbursements.